Mortgage should I fix or stay on variable

C

casperjack

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Hi I am currently on a SVR rate with EBS, but will be looking to sell house in about 3 years as will have to move in with my mam to look after her.

Just wondering if I fix now with Ebs for say 4 or 5 years will they charge me if I want to pay off mortgage when I sell house as I should be able to fully clear what I owe. Just afraid to fix for too long incase I have to move sooner and will have to pay a penalty rate but really could do with some monthly savings now
 
Well, you definitely shouldn't stay on variable. You're paying 630 a year in interest that you don't need to (90k * 0.7%)

So, the question is how long to fix for.
I normally say fix for as long as you can, but in your circumstances where you've a plan to sell in maybe 3 years, then fix for 3 years.

If you fix for 5, and break in 3, how bad could break fee be? If interbank rates remain as they are you're looking at maybe 400. If rates go up, maybe zero. I can't see a situation where rates fall but it could happen and push up a break fee. But you're looking at an extreme scenssce where it's more than you'll have saved in interest.

I'd say fix for 3 years, keep under review and reassess each year to see if your outlook changes.
 
RedOnion said:
If you fix for 5, and break in 3, how bad could break fee be? If interbank rates remain as they are you're looking at maybe 400.
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Hi Red, just wondering about the 400 estimate.
Looking at yesterday's swap rates, the 5 year is about 0.33%. Working out the 2 year forward rate for 3 years time gives about 0.81%. This suggests market rates would have to end up almost 0.5% below current expectation for any breakage fee to apply in this scenario. Are interbank rates that different to swaps or am I missing something?
 
cpt_boom said:
Working out the 2 year forward rate for 3 years time gives about 0.81%
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What's that now? I think you're overcomplicating it.

The 2 year rate right now is just under zero. So if rates remain the same, that's the rate they will use (i.e whatever the 2 year rate is in 3 years time). Trying to calculate forward rates you're including liquidity premiums and an option so you'll come up with a different rate.

If in 3 years time the 2 year rate is above 0.33% (assuming that's the 5 year rate now), then there'll be no break fee as the bank won't suffer a loss.

The 5 year rate has moved around a bit over past 3 weeks as a fallout from Italian situation, but is back down again.
 
Ah, ok. I was thinking that liquidity premium would be less of a issue for swap rates vs. bond yields. Is it possible to get the 'true' market expectation of future swap or interbank rates?
 
Ah, I understand your point now. Yes, you could infer that in 3 years time the market currently expects the 2 year rate to be higher than the current 5 year rate.
There is a way to calculate it, but treasury products aren't my area so I won't pretend to know any more than that!

But remember, that's the current expectations, not necessarily what will happen.
 
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